Current Regulation Drafting Procedures
By Latchezar Bogdanov and Petya Mandova, Institute for Market
Economics
The report presents the results from a case study on the document flow
and regulatory procedure. The interviews with public officials in three
branches of the executive power (Ministry of Finance, Ministry of Economy
and Ministry of Agriculture) were held in a three-week period (November-December
2000) by the IME staff. We summarized the results in order to show the
advantages of the preliminary evaluation of regulations. IME identified
examples of good practice within the surveyed ministries. However, the
procedure should be reconsidered to make the decision-making process more
efficient.
2001, 
(File size
30 KB)
The studies on the impact of regulations are within the framework of the project "Regulations' Impact on Democracy and Economic Freedom", financed by the German Marshall Fund of the United States.
1. Toward
a new generation of Bulgarian power policy
2. Companies' expenditures
related to the abolishment of the "zeros"
In the ten years of economic reforms in Bulgaria, many contradictory policies,
misjudged raegulations, and misunderstandings among the institutions were
born. After some hard work, in the assesment of the regulation acts this
year, IME has decided to announce a competetition for the most unreasonable
economic regulation in 2000. You can use this
form for your comments and nominations.
Toward a new generation of Bulgarian
power policy
Krassen Stanchev, Latchezar Bogdanov
The debate on the Energy Strategy in Parliament earlier this month was more than heated. To the 'joy' of one and all, exceptional agreement was reached on the issue, both on the left and right. The Government defended Bulgaria's 'national interest' - to keep the Kozlodouy nuclear power plant operating - and Parliament supported it. Without entering into discussion as to the effectiveness of nuclear energy and relevant agreements with the EU, we consider that the debates failed to take into account certain principles of the Strategy which, to a much greater extent and in the long run, would reduce the competitiveness of Bulgarian power generation and, more specifically, the production of electricity.
Since the three-year agreement with the IMF was first discussed (Sandanski, March 1998) the idea of a change in power generation has met with concern from relevant teams of the World Bank. Now, it is up to the legislative assembly to take a stand on this Strategy. However, it is unlikely that even one institution will be able to change its philosophy within the stipulated short-term period.
A singular failure
The 'single buyer' model is linked with problems and will maintain aspects of the status quo which fail to interest investors or shift the investment risk to the governments and, hence, to taxpayers and the economy.
1. There is no regulated access of third persons to the
transfer network. This prevents consumers from choosing and contracting
a specific (least expensive) producer of electricity which would enable
competition to eliminate inefficient producers. Producers are not motivated
to reduce basic costs if the National Electric Company (NEK) buys the
energy regardless of price ceilings.
2. The 'single buyer' strategy will again allow NEK to realise across-the-board
subsidisies by buying both cheap and expensive electricity and then selling
it to distributors at a uniform price. In practice, more efficient producers
will again subsidise inefficient ones.
3. If NEK is the only buyer, obliged to buy set amounts of produced electricity
under long-term contracts, in the event of decreased consumption it risks
having to pay for energy it won't be able to sell later. The question
arises who will cover these expenses. According to the logic of previous
practice - all other consumers through increased prices (or, in case of
State subsidies, all taxpayers).
4. A similar problem arises if there is a deficit in production, i.e.
if NEK signs contracts to sell certain amounts to distributors which,
due to technological or other reasons, producers won't be able to supply
at a given moment, it would have to pay damages. Thus NEK would again
take on liabilities and in turn pass them on to taxpayers or consumers.
5. If NEK becomes the only buyer, producers won't have direct access to
the market and the chance to vie for consumers (through lower prices).
If nothing else, this would put off private (foreign) investors in electricity
production.
6. Since losses are incurred during transfer - expenses being proportional
to distance - the normal thing is to keep producers as close as possible
to consumers. In the 'single buyer' case these stimuli disappear and there
is no economic advantage in building capacities close to consumers.
7. Even if access of third persons to the transfer network is allowed
in some form, there won't be sufficient guarantees for free competition.
A typical example is provided by the behaviour of Bulgargaz which categorically
refused direct supplies from Gazprom to Agrpolychim, despite the fact
that gas transfer is not an exclusive right of NEK and its related structures.
If NEK owns the power transfer network, as well as the producers of electricity,
the company will be directly motivated to refuse the access of third persons
to the network, or may impose discriminatory fees. For these reasons,
control of the transfer network should be delegated from NEK to an autonomous,
independent regulatory body, functioning according to strict and thoroughly
spelt-out rules.
European deregulation
Throughout most of the 20th century, electricity production was considered to enjoy almost unlimited economies of the scale and is therefore a 'natural monopoly' (governments thereby rationalised state monopoly over the production and transfer of electricity). However, technologies change, the most important prerequisite for change in the energy sector being the increased availability of cheap natural gas after the 1980s. The production of electricity in small gas-powered stations thus became economically more favourable. The existence of a large number of producers increased the need to 'open' the market. Although transfer networks are still a 'natural monopoly' at the moment, their role is increasingly being limited to providing paid access to distributors or consumers who have bought energy from producers.
Deregulation of the EU market is already in progress. According to EU legislation, as of February 19, all big electricity consumers will be able to choose the producer they want to buy it from. This concerns consumers of over 40,000 MW year, about 23% of the energy market in the EU. The threshold is expected to be lowered to 10,000 MW a year in 2003, which will liberalise some 33% of the market in the Union. Not all countries, of course, accept deregulation the same way: Italy and France still haven't changed their domestic legislation, and Greece, Ireland and Belgium were granted postponements.
For the time being the process has advanced most in Great Britain and Scandinavia. Great Britain privatised its 12 regional electric companies in 1990; access to the network being controlled by an independent regulatory body. Some 55,000 consumers were able to choose their supplier after 1994. The results are favourable: prices during the 1990-1997 period dropped by about 10% for small consumers and by 20% for industrial consumers; at the same time, carbon dioxide emissions were reduced 40% and nitrogen oxide by 50%. This was due to the creation of competitive conditions which stimulate the introduction of efficient electric power stations, running on natural gas - since 1989 all new 20,000 MW capacities use this fuel.
Scandinavia has a common energy market under which a fee is paid for access to the electricity market during the initial period when the supplier is changed. To a certain extent, limits the freedom of choice by imposing additional expenses on the deal. At the moment, the long-term planning of the Scandinavian market is supported by the spot, forward and futures market of electricity, organised by the Northern Pool. An international electricity market is planned to open in Amsterdam in May this year.
The other countries are at different stages of liberalisation. Germany liberated its market in 1998, but the access of third persons was poorly regulated. As a result, Enron of the United States won supply contracts but was refused access to the transfer network. France, too, prefers to retain monopoly on the transfer network - yet Electricite de France recently bought London Electricity for $3.2 billion, hoping to gain from the free British market.
As a result of the greatly delayed liberalisation of the European market, consumers pay on average 50% more than Americans. Yet the ideas for deregulation are nothing new: prior to the 1920s electricity in most countries was produced, transferred and distributed by competing independent companies and many enterprises produced their own energy, thus saving transfer and distribution expenses.
It was the same in Bulgaria.
The solution
1. Power generation needs a strategy that is alternative
to the 'single buyer-seller' model. To make up for lost time it could
be assigned to a leading consultancy or investment institution, or a similar
consortium. This is a mediation of investment banks in deregulation according
to the example of the Eastern European countries with systems of a fixed
exchange rate and currency board (Bosnia-Herzegovina, Estonia, Lithuania,
Latvia) and/or Russia. There is nothing terrible or incompatible with
national security in this.
2. Parts of NEK or activities (including management, taking out of exploitation,
renewal and service of power stations and nuclear plants) can be given
up on concession.
3. In 1999 and 2000: elimination of direct, indirect and across-the-board
subsidies (and double price standards) for central heating and all other
energy sub-sectors; compensating the poor or a programme to that effect,
adopted in 1999.
4. A regional picture of the market of electricity, energy carriers and
transfer networks, etc., updated on a regular basis. Such a picture by
a renowned company would cost DM 200,000-400,000.
5. In view of the key role of infrastructure in the investment programme
and of the link of power generation with the other infrastructure sectors,
a similar picture for transport and communications, focusing on legal
obstacles, border crossing and customs procedures, as well as transport
logistics, is also necessary.
6. Competitiveness needs to be introduced in audit, ending the tradition
of one auditor servicing almost all natural and state monopolies.
Companies' expenditures related
to the abolishment of the "zeros"
Institute for Market Economics
According to the Denomination Act (transitional provision, art. 5, para.1) "existing commercial entities are obliged to apply for new entry in the commercial registry of the court of the changes in the equity capital, caused by the enforcement of this law, in 1 year period after the law is enforced"; "No court or publication fees are collected… for the new entries and the publications in State Gazette".
Court and publication fees are however only a part of the expenses incurred in pre-registration of commercial entities. (By the way, the fact that no fees are due does not mean that the service provided by the court and the State Gazette costs nothing). The other expenditures vary according to the type of incorporation as follows:
Limited Liability Companies
The decision for change in the equity capital should be taken by the general meeting of the partners, which is solicited through written invitation sent at least 7 days in advance;
The decision of the general meeting of the partners is laid down in a protocol, or in the corporate book, if such exists;
Up to now we have costs in terms of working time of the
company itself or its partners, which are approximately 2 working days.
After that additional expenses for lawyers are incurred, who will:
· prepare the application to the court;
· present the application before the court;
· check regularly if court decision has been issued;
· receive the court decision.
The preparation of the application takes not more than 2 hours. Taking into account the expected excessive overload of the court with pre-registration, and the fact that submitting applications, checks on the current status of the case in court, and receiving the court decision happen at one and the same place - the court secretariat, which works only 4 and a half hours a day (9-12 a.m. and 1:30-3 p.m.), the pre-registration process will use up at least 20 hours of lawyer efforts.
We base our calculations on the average wage for 1998 (for company time), which according to National Statistical Institute is BGL 187 438, and minimum lawyer fees (for lawyers' involvement). These costs we multiply by the number of the registered partnerships (latest data from 1997). The results are as follows:
Costs of soliciting the general meeting of the partners
and preparing decisions: 2 working days multiplied by 8 925 leva multiplied
by 75 544 partnerships = BGL 1 348 460 000;
Lawyers' fees: 75 544 partnerships multiplied by 50 000 leva (minimum
lawyer fee for court registration set by the Ordinance 1 of the Bar Association
on the Lawyer Fees Rates) = BGL 3 777 200 000.
Joint Stock Companies and Limited Joint Stock Companies
The decision for change in equity capital is taken by the general shareholders' meeting. The latter is solicited by invitation that should be published in the unofficial part of the State Gazette. The publishing fee is BGL 22 500. Therefore the costs of soliciting the meeting would be 5014 registered JSCo and LJSCo multiplied by 22 500 leva = BGL 112 815 000.
Shareholders will hardly need to preliminary review written documents; however, travel expenses would be incurred by shareholders who do not reside at the place of the meeting. Unfortunately these costs are difficult to measure; we suppose that they will probably range between 20% and 50% of the above mentioned amount.
The general shareholders meeting itself would bring about rent expenses, as well as protocol and scrutineers expenses. The daily hall rent ranges between BGL 36 000 and BGL 360 000, depending on the size and location of the facility, which multiplied by 5 014 companies, results in a cost range of BGL 180 504 000 - 1 805 040 000 (when calculating the total costs we will take into account the minimum).
The procedures for preparing application, submission, regular checks and receiving the court decision are the same as for partnerships.The minimum lawyer fee for registration of JSCo or LJSCo, as set by Ordinance 1 of the Bar Association on the Lawyer Fees Rates, is BGL 100 000. The total cost is 5 014 companies multiplied by 100 000 = BGL 501 400 000.
Additionally, we should take into account the costs of the corporate administration for preparation of the meeting, which are approximately 2 days multiplied by 8 925 leva multiplied by 5 014 compaies = BGL 89 499 900.
Total cost for companies:
1 348 460 400
3 777 200 000
112 815 000
501 400 000
89 499 900
Total=BGL 5 829 375 300
Brief comment
In "Capital" weekly, issue 5-11 June this year Latchezar Bogdanov and Georgi Ganev advocated for preliminary impact assessment of regulations, which will identify who gains and who loses from the introduction of a regulation, and what the overall impact on the economy will be. Companies' costs related the "abolishment of the zeros" are a clear example of needless compliance costs. Their size is approximately 0,03 of GDP. Probably the number of companies which pre-registered in October 1998 to meet increased minimum required equity is lower than 1997 numbers used in the above calculations. What is important hwever, is the fact these companies should go through the same procedure for a second time in 13 months. The costs incurred are taken away from other productive activities, including investment.
It is not likely that during an election year the members of the parliament have decided to remunerate lawyer with additional, and not particularly toilsome income. The embarrassing fact is that nobody thought of relieving the cost burden on companies related to the "abolishment of the zeros". There is, however, still enough time to change the law.